SEC Chairman Donaldson Releases Staff Report on Hedge Funds

FOR IMMEDIATE RELEASE2003-125

Revised version

Washington, D.C., September 29, 2003 -- Securities and Exchange Commission Chairman William H. Donaldson today released the SEC staff report "The Implications of the Growth of Hedge Funds." The report follows a fact-finding investigation into the operations and practices of the hedge fund industry.

During its investigation, SEC staff reviewed documents and information from 65 hedge fund advisers managing more than 650 different hedge funds with over $160 billion of assets. Staff also visited hedge fund advisers and prime brokers and conducted a series of examinations of registered funds of hedge funds. In addition, the staff met with a variety of hedge fund industry experts and observers. Complementing the study, the Commission held a highly successful two-day Roundtable, during which a variety of experts discussed key aspects of hedge fund operations. The staff also analyzed approximately 80 comment letters that were received by the Commission on hedge fund issues following the Roundtable.

In its report, the staff identifies a number of areas of concern regarding hedge funds:

the lack of Commission information about hedge funds and their advisers' activities;

the lack of prescribed and uniform disclosure by hedge fund advisers;

valuation and other conflict of interest issues;

the potential for increased investment by less sophisticated investors, directly or indirectly, in hedge funds; and

despite a relatively low absolute number, an increase in the number of enforcement actions regarding hedge fund advisers.

Many of these concerns arise from the unregulated status of hedge funds. The report contains a number of recommendations to improve the regulation and oversight of the hedge fund industry. The staff's primary recommendation is that the Commission consider revising its rules to require that hedge fund advisers register under the Investment Advisers Act, taking into account whether the benefits outweigh the burdens of registration. The staff's report can be found on the SEC's website at www.sec.gov/news/studies/hedgefunds0903.pdf.

Chairman Donaldson said, "Currently there is more than $600 billion invested in hedge funds. That figure is expected to exceed $1 trillion in the next five to 10 years. The substantial growth in hedge fund assets, and the Commission's lack of information about these investment pools, make the study released today particularly important. The staff has done a fine job of preparing the report and presenting the Commission with comprehensive recommendations. I, along with my fellow Commissioners, look forward to thoroughly reviewing this important work and the additional comments from all parties interested in the hedge fund industry to determine how we may wish to proceed."

For further information, contact Herb Perone, John Nester or John Heine of the SEC's Office of Public Affairs at 202-942-0020.